Ethereum ETH -5.26% staking has long been known to draw the attention of the U.S. Securities and Exchange Commission. While the long-term impacts of the agency's crackdown on staking are still uncertain, early responses indicate significant regulatory shifts ahead.

The SEC had previously gone after staking services at Kraken and Coinbase, and the spot Ethereum ETF issuers all removed staking from their applications to get approval.

The regulator also launched an investigation into Ethereum 2.0 after the network changed its consensus mechanism to Proof-of-Stake from Proof-of-Work. The SEC had been vague about whether it considered ether a security, with the agency sometimes seeming to suggest all PoS tokens were securities because of the rewards users expect to get if they stake their tokens. But the Commodity Futures Trading Commission also viewed ether as falling under its purview, further complicating the matter.

Legal actions and their implications

The SEC closed its investigation on Ethereum late last month after approving the spot Ethereum ETF 19b-4s, two data points suggesting the agency might be more comfortable with a commodity classification.

However, the SEC did not let up against Consensys, the software development company behind the popular crypto wallet MetaMask. Last week, the agency sued the company, taking issue with its swaps and staking service. The lawsuit did not come as a surprise, as the company had disclosed it had received a Wells notice in April, which typically indicates an upcoming enforcement action.

Maybe more surprising was that the suit also named Lido and Rocket Pool’s staking programs as securities. It is less common for the SEC to go after big-name DeFi protocols, although the tides have been shifting after the agency sued Uniswap, which some noted as the start of the “war on DeFi.” While the SEC’s stance on staking was well known, its targets had remained centralized staking service providers.

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Some are skeptical of the SEC’s argument since MetaMask is non-custodial and open source. MetaMask also doesn’t provide staking itself but rather an interface to interact with liquid staking protocols, which might not make it an actual intermediary.

On June 6, 2023, when Coinbase was sued over its staking program, there was a surge in cbETH burns as users exited the platform over the uncertainty of its future. At the time, it was the second largest day of redemptions, following April 13, when withdrawals of staked ETH were first enabled with the launch of Shapella.

But it seems the broader Ethereum staking ecosystem might be avoiding that fate. There has been a slight uptick in the Ethereum withdrawal queue since June 28, climbing from 4 to 132 validators pending exit by June 30. Nonetheless, the queue is still relatively short; it was at 605 earlier this month. The agency also hasn’t directly targeted any decentralized staking providers yet, which could serve as an exit catalyst down the line. It’s still quite early to identify the long-term impacts of a tougher U.S. crackdown on staking.

This is an excerpt from The Block's Data & Insights newsletter. Dig into the numbers making up the industry’s most thought-provoking trends.